Essays on macroeconomic performance under alternative exchange rate regimes

Since Friedman (1953) an advantage often attributed to flexible exchange rate regimes relative to fixed regimes is their ability to better insulate the economy against real shocks. I use a post-Bretton Woods sample (1973-1996) of 74 developing countries to assess whether the response of real GDP, real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes. I find that real GDP and the real exchange rate responses are significantly different across regimes. In response to a negative terms of trade shock, fixed regimes experience large and significant losses in real GDP growth and the real exchange rate depreciates only after two years. Flexible regimes, on the other hand, are associated with small growth losses and immediate large real depreciations. Negative shocks are inflationary in floats and deflationary in pegs. In the second chapter I document the large dispersion in price levels that exists between different exchange rate regimes. In low and medium income countries, price levels in floats are, respectively, 30 percent and 24 percent smaller than in pegs. A simple application of a stochastic open economy model with nominal rigidities suggests a possible explanation for this fact.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2001

Author dc:creator

• Broda, Christian M. (Christian Miguel), 1975-

Advisor dc:contributor.advisor

• Rudiger Dornbusch.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/8655

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/8655